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The latest 10K says they have 400,000 m of 1G wire in stock. That seems a large amount of all the 1G wire produced ever. So how come it is not sold? Were customers waiting for 2G or is there some sort of problem with 1G??

The one-g wire issue is no longer an issue; it is an asset, IMO.

The decision was made earlier this year to stop 1-g production; live off of the inventory built up of 1-g for any orders that did come in before December 2007; and significantly speed up the move to 2-g, with the first major milestone being 720k meters/year of 2-g by end of cy 2007. Much (in fact, most) of the 1-g inventory was immediately written down as a loss as a conservative accounting measure:

In the fourth quarter of fiscal 2006, we recorded a $4,960,000 impairment charge to write down the value of our 1G asset group (consisting of equipment, patents and licenses), related to our decision to complete the transition of our wire manufacturing operations from 1G to 2G HTS wire, and to indefinitely suspend 1G HTS wire manufacturing.

Entering the 2nd quarter 07 - the quarter just ended - the company had 400k m of 1G inventory. As mentioned in last week's conference call, all but 85k m were previously written off; so every meter of that 400k m inventory above the first 85k m is pure profit.
In this past quarter, 2q07,

-- Received orders for nearly 150,000 meters of first generation (1G) HTS wire from various customers, including the Korea Electrotechnology Research Institute (KERI). KERI, based in Changwon, South Korea, will utilize 22,000 meters of 1G wire to begin a 10-year project focused on developing superconductor magnetic energy storage (SMES) systems.
That means that, with the 150k m of orders in 2q07 alone, 65k m will be booked as pure profit. That leaves 250k m of 1G wire inventory left on the floor in Massachusets - all of it already written off - unsold; but with 150k m sold in the last quarter alone, company said during the last conference call that they have a high confidence that they will have all of that remaining 250 k m sold - falling straight to the bottom line - by the time the 720k m/year, 4-cm line comes online by end of 2007. That seems reasonable to me.


We've discussed previously where we are on the supermachines front; particularly with respect to ship motors and generators. The utility super-var program appears to be at least six-months behind schedule (based on the original delivery date for the first TVA SuperVar of June 2006, now December); but, considering the game-changing nature of the devices, I'd almost say that they are 'only' six-months behind. Though those SuperVars were originally intended to be profitable - even using 1-g wire - the original agreement with TVA in 2003 apparently locked in costs that, I think, didn't allow or consider (from AMSC's viewpoint) the huge increase in raw material commodity costs that have occurred since then. TVA has committed to buy at least two more Super-Vars under the current contract; I think it is fair to assume that those, as well, will not be profitable, barring any further information from the company. However, considering the 'quality' of our power grid, how susceptible it is to disruption et al; I do anticipate that other utilities - slowly - will order SuperVars from 2007 onward as the operational units at TVA prove themselves. I think it is clear that the company will ensure that those units are profitable; whether using one g, or two g wire.
(My opinion: the post-TVA orders from other utilities for SuperVars will come slow enough that the company wll be use its new 2G, 348 wire optimized for rotating machine applications:
-- Achieved levels of magnetic, electrical, thermal and mechanical performance required for commercial electromagnetic coils utilizing a new three-ply, 4.8-millimeter wide 2G HTS wire that the company has branded as 348 superconductors. Electromagnetic coils are the core component of virtually all electrical products beyond power cables.).

Remember, SuperVars still use less HTS wire than, say, a large power cable wire order would. In fact, the last two SuperVars the TVA is committed to order may, by themselves , use up every single meter of the 250k m of 1G remaining on the floor (discussed below), depending on the power ratings of those last two units).

So I think the one-G will get sold; possibly sooner than we think. Remember, there's little risk in anyone buying some 1G and trying it out; the 2G - the real deal they would hopefully buy in the future - is a drop-in, plug-and-play replacement for any 1G that potential customers would test. Now we've discussed previously how this company might not be able to keep up with the demand once the whole 2G wire thing is perceived by utilities as 'real', at the very same time they are starting to do huge infrastructure upgrades. Those utilities likely to want to start laying real 2G stuff in a few years will also probably realize that; i.e, if they wait longer than necessary, there may not be any 2G wire to be had without several years' wait. That, coupled with the fact that 1G and 2G are functional clones of each other, is another reason to believe that in 2007 more than a few utilities would want to order some 1G wire for testing to get ahead of the curfe and to get in line for later 2G. In fact, it would not be inconceivable to me that they could have orders to sell all of the remaining 1G wire by 31march07, the end of this fy.

So whether via TVA fulfilling its SuperVar order commitment; or, utilities wanting to start the process of getting in line for HTS - I think the chances are better than 'good' that the 1G inventory will be sold off in 2007.

2G wire production is continously increasing; but, as the company has stated several times, they are keeping a majority (well over 50%) of 2G for in-house use; so any 2G orders you hear about are, by definition, only for a minority of what they are actually producing, at least until end of december 2007. That, coupled with the fact that 1G is an acceptable test wire in prep for someone buying 2G...and, that all the remaining 1G inventory is now being sold at a profit.....is what leads me to say that the one-g wire issue is no longer an issue; but is, if anything, an asset.

One more thing: the company mentioned during the conference call that they are currently in discussions with LIPA for a follow-on order - let's call it LIPA Part B (as opposed to the 600m Part A cable being put into the ground right now) - that is ten times longer than Part A (approxmiately: at least 5 miles, versus less than half a mile for part A). That (potential) order, alone, cannot possibly be met with the remaining 1G inventory. That may explain why - in the same conference call - they made it known that, along with the 3 conduits they've just buried in Long Island (one conduit per phase of AC), they also buried a fourth conduit at the same time - to test a single phase, 2G cable.
So, my read is that the current LIPA/AMSC test plan is this:
- Finish burying 4 conduits, 600m long; 3 for a 1G cable; a fourth conduit for a 2G test cable.
COMPLETED.
- pull the three, 600m 1G cables through the conduits. First quarter cy 2007.
- Test that three-phase cable for X months in 2007.
If successful:
- Pull through the fourth conduit 600m of 2G-based cable. Test it for Y months. Latter half of 2007??
- If successful.......sign and finalize the agreement for plan B: an at least 5-mile, 3-phase AC cable made of 2G wire; since they won't have any 1-G wire left.

jp
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